BLOCKCHAIN SPECIAL

BLOCKCHAIN Bitcoin and other virtual currencies are grabbing headlines lately, and not just for their volatility. The parent company of the New York Stock Exchange is looking into building a Bitcoin exchange; Goldman Sachs is starting a desk to trade cryptocurrencies (New York Times paywall). But Warren Buffett has said virtual currencies have no intrinsic value, and the Nobel laureate Robert J. Shiller wrote recently that despite the “aura of exclusivity” surrounding cryptocurrencies, no one “outside computer science departments” can explain how they work. Add to that the fact that several existing cryptocurrency exchanges have been hacked since 2014 and, well, ouch.

As that battle rages, managers shouldn’t lose sight of a potentially bigger game-changer that has made cryptocurrencies possible. That’s blockchain, the shared online ledgers that provide a record and history of ownership of a cryptocurrency—or, for that matter, a utility’s value chain(though the industries that may gain most are finance, government, and healthcare). In fact, 90 percent of major Australian, European, and North American banks are already experimenting with or investing in blockchain.

Don Tapscott, co-author of Blockchain Revolution, thinks of blockchain’s future as a “global distributed ledger or database where anything of value, from money to music to votes, could be managed, transacted, and exchanged in a private and secure way.” Tapscott, a blockchain-will-change-the-world guy, told McKinsey that “the Internet of everything needs a ledger of everything for it to work.”

While everyone loves an optimist, recent analysis suggests that 70 percent of the value blockchain can offer in the short term will derive from reducing costs and driving operational efficiencies, and that it is still three to five years away from feasibility at scale, in part because of the difficulty of establishing common standards.

In light of security and other concerns, we expect that most companies developing commercial applications of blockchain in the next few years will do so on private networks that control access and editing rights, until the conditions are in place to scale up to public platforms like Bitcoin’s. The good news is that the same analysis identified more than 90 use cases already in play at varying levels of maturity across major industries.

How can companies determine if blockchain has strategic value that justifies major investments at this point? To start, they should focus on their ability to shape an ecosystem, establish standards, and address regulatory barriers. Now’s the time to get cracking. A World Economic Forum survey suggested that 10 percent of global GDP will be stored on blockchain by 2027.

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